Flying Kangaroo leaps into a shaky alliance

The new Emirates-Qantas tie-up, granted qualified approval by the Australian Competition and Consumer Commission on Thursday, marks the end of a long and glorious era for the Flying Kangaroo.

While noting that the alliance is “like to result in some public detriments through its effect on competition”, the ACCC has nevertheless given the plan an important initial green light, while noting that it wants to check things again in five years – instead of the 10-year period proposed.

Ten years, of course, is a long time in modern commercial aviation.

If you has told someone 10 years ago that the mighty Qantas would be relegated to junior partner in a tie-up with an Arab airline, they would have found it hard to believe.

Yet many analysts are now tipping further shrinkage in Qantas's network, as Emirates steps in to fill the gap.

So what to make of it?

Qantas CEO Alan Joyce says there is no other choice – Qantas is struggling and needs this tie-up to survive.

Yet it is impossible to test Mr Joyce's claim because of the opaque and mysterious way the airline has been managed in recent times.

For example, in February 2011, Mr Joyce declared an underlying profit of $165 million for the half year. The result was 175 per cent above the prior year's corresponding period.

At the time Mr Joyce boasted that: "Qantas improved yield by 9 per cent, and increased capacity by 3.3 per cent, demonstrating a strong revenue recovery across both the international and domestic divisions. The result was achieved despite the significant operational and financial challenges of the A380 disruptions and northern hemisphere snowstorms.”

Yet just a few short months later, in June 2011, this sunny picture had apparently descended rapidly into an emergency.

Mr Joyce was now lamenting that: "Qantas International is forecast to generate a loss before interest and tax of approximately $200 million … with a weaker result expected next year. Qantas International is the group's weakest business – it achieved required returns only three times in the past 15 years. Clearly the situation is not sustainable."

To fall so rapidly would require a $25 million a month minimum loss. Yet the company did not report the profit downgrade until June 6, 2011. Most airline boards keep track of airline performance on a daily basis or the very least every week. How could such a staggering fall be left unnoticed and what could cause it?

A surge in fuel prices? In fact, the price of fuel stayed steady during this period.

A huge drop in passengers? In fact, the load factor – the percentage of seats filled – went up and remains around 82 per cent.

You would think that an outsider could analyse the loss by simply examining Qantas's books, yet because of Australia's accounting standards this is impossible to do properly, because Qantas International has not been defined as a segment for accounting purposes.

Understanding any loss in this area, therefore, is simply a matter of taking Mr Joyce's word for it.

That means that how much Qantas "needs" this Emirates tie-up is completely debatable.

Certainly, looking at it in from a national interest point of view it looks tough to justify.

Those I speak to in Asia are always amazed at how Australia is allowing Qantas to shrink.

A viable aviation industry is part of our national infrastructure. Qantas has proven its unique value time-and-time again throughout our history: evacuating Australians after the bombing of Darwin, the Vietnam War, Cyclone Tracy and the Bali bombings. With this sort of consistent record over our history, do we really think a strong national carrier will not again be needed in times of emergency?

Meanwhile, the economic importance of our national carrier was made clear when Mr Joyce grounded the airline last year. The move was estimated to cost the economy $250 million.

Qantas pilots have long-argued that the best way forward for Qantas is to take the German approach to operating in a high-cost environment: focus on offering a premium product where people are getting superior quality for the extra amount they pay. Instead, Qantas management have opted for a pre-GFC, American-style approach – racing to the bottom on costs and deploying complex, high-wire financial manoeuvres.

It's tough to see how tying a huge part of national infrastructure to the continued fortunes of a Middle Eastern government-owned airline is anything other than a gamble.

Yet Mr Joyce is in the captain's seat, and we have no choice but to take his word that it's a good one.

Captain Barry Jackson is president of the Australian and International Pilots Association

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